HONOLULU -- Multiregional operators will continue to increase their market shares at the expense of regional players, Steve Burd, chairman and chief executive officer, Safeway, Pleasanton, Calif., said here last week.
"The multiregionals won't roll over the regionals like a bulldozer, but most regionals are likely to feel they will be better off tied to a large operator," Burd said.
"One reason Genuardi's opted to sell to Safeway was because we agreed to keep their brand name. So the Genuardi's name lives on, just tied to a bigger ship."
Safeway acquired Genuardi Family Markets, Norristown, Pa., late last year.
Burd made his remarks in a keynote address at last week's annual convention of the Western Association of Food Chains.
He said he expects consolidation in the United States to continue, with the top five players likely to double their share of the U.S. market from 35% today to about 70% within 10 years.
Burd said the top five multiregionals are Ahold USA, Chantilly, Va.; Albertson's, Boise, Idaho; Kroger Co., Cincinnati; Safeway; and Wal-Mart Stores, Bentonville, Ark., "and it will be difficult for any other company to enter that group," he added.
"But there will always be room for niche players," he added, "so if you want to be an independent in the next few decades, you probably should think about increasing the amount of differentiation to protect your niche."
Burd also said he expects the pace of consolidation to accelerate, though selling prices are likely to decline.
"There is still a lot of [potential for merger] activity, but there's a lull right now because sellers aren't ready to accept the fact transaction multiples are declining."
Last year's acquisition by Delhaize America, Salisbury, N.C., of Maine-based Hannaford Bros. for a multiple of 12 times cash flow was an exception to declining valuations, Burd said, with most transactions unlikely to exceed a multiple of 8 to 8-1/2 times cash flow.
Safeway paid 7 times trailing cash flow for Genuardi's late last year, he noted.
"Over the last 12 months, Safeway looked at nine possible acquisitions -- more assets than we looked at over the previous four years -- but we bid on only two. One was Genuardi's, and the other wasn't sold, possibly because they didn't like the prices that were offered or possibly because we were the only bidder."
One reason for lower valuations is the shrinking number of bidders, Burd said, recalling 1988, when Kohlberg Kravis Roberts & Co., the New York-based investment company he was working for, was one of eight bidders seeking to acquire Stop & Shop Cos., Quincy, Mass. "You'll never see eight bidders on one deal again, because as the industry consolidates and potential conflicts develop, the number of acquirers will shrink."
The next phase of industry consolidation is likely to involve mergers between supermarket operators and other distribution channels, Burd pointed out.
"There's an ongoing blurring of retail channels, and our management team believes we are essentially in a service business and we can operate any kind of retail business or any kind of service business.
"So it makes perfectly good sense for managers with skills in the retail food industry to apply those skills in other retail businesses, and it will happen somewhere down the road."
In other comments at the convention, Burd said:
Wholesale clubs may pose less of a threat to food retailers in the future "because they are reaching a saturation point, though they haven't reached it yet. But even though Costco has doubled its size since 1992 and Wal-Mart Supercenters have become a factor and Neighborhood Markets are growing, Safeway has compounded its share price 45%."
Selling groceries over the Internet can be a profitable business, but only for economic models that include a brick-and-mortar partner, not for pure plays. The only retailer who is clearly enjoying Internet success is Tesco in the U.K., Burd noted, which does a significant share of sales on-line.